The The Socio Socio - - Economics Economics of of Geographical
Geographical Indications Indications
by
Roland Herrmann*
- WIPO Worldwide Symposium on Geographical Indications, Lima, Peru, June 22-23, 2011 -
Background
Economic and political discussion on geographical indications is booming;
Europe:
move away from traditional instruments of Common Agricultural Policy;
competitiveness and market income in the agricultural and food sector increasingly important;
high-quality products with regional origin major element of European food quality policy;
instrument of European rural development policy.
Questions
1. Is there an economic rationale for the protection of geographical indications?
2. Which regulations does the EU provide for the
promotion and protection of geographical indications and food specialties?
3. How can these policies be evaluated?
Potential benefits?
Potential costs?
For the affected producer groups?
For the society?
Introduction
1 Introduction
2 The Economic Rationale for the Protection of Geographical Indications
3 Existing Regulations for the Protection of Geographical Indications and Food
Specialties: The EU Case
4 Potential Benefits and Costs for Producer Groups and the Society
5 Summary and Conclusions
2 The The Economic Economic Rationale Rationale for for the the Protection
Protection of of Geographical Geographical Indications
Indications
2 Economic Rationale (1)
Consumers may suffer from quality quality uncertainty uncertainty and asymmetric asymmetric information. information
High and low qualities may be sold at the same price.
Akerlof: High qualities may be crowded out by low qualities ("lemon" problem).
Here: Quality is due to regional origin.
Protection of geographical origin may avoid
market failure!
Economic rationale (2)
Legal protection and associated label: Geographical origin turns from a credence to a search characteristic.
Protection of regional-origin label reduces search costs and, thus, raises consumer welfare.
Intellectual property right: High-quality producers get a reputation premium and a higher income.
Imitators and non-original producers are kept away from the market.
Beneficial for remote regions, rural development and economic cohesion.
3 3 Existing Existing Regulations Regulations for for the the Protection
Protection of of Geographical Geographical Indications
Indications and Food and Food Specialties
Specialties : : The The EU EU Case Case
Legal Protection of Geographically Differentiated Foods by the EU
Regulation 510/2006 captures the legal protection of origin-labelled foods:
Protected Geographical Indications (PGIs)
Protected Designations of Origin (PDOs)
Regulation 509/2006 provides additional legal
protection on agricultural products and foodstuffs for Traditional Specialties Guaranteed (TSGs)
Major element of European food quality policy
Objectives: improving income of farmers; retaining rural population in these areas.
Differential Requirements of the EU Labels (1)
Protected Geographical Indication (PGI)
Protected Designation of Origin (PDO)
Production in a given geographical area
Processing in a given geographical area
Prepared in a given geographical area
and/or
and/or
and
and
Differential Requirements of the EU Labels (2)
Traditional specialties guaranteed (TSGs) (Regulation 509/2006) have to carry a a specificspecific character:character
Production using traditional raw materials
and /or
traditional composition of a product
and/or
traditional mode of production
Survey of PDOs, PGIs and TSGs
Policy Measures for Support and Promotion of Geographical Indications
Creation of a collective brand: Protection against imitation by non-original producers:
club good is established
if successful: price premium initiated or secured
Funding of origin-related promotion in the national or provincial agricultural policy:
Co-financing
Subsidies on advertising
Issues in the Evaluation of Geographical Indications
(1) Will there be a price premium by the protection and promotion of GIs?
(2) Are producers better off by participating in a protected collective brand?
(3) How can the legal protection of GIs be
assessed from the society's point of view ?
4 Potential Potential Benefits Benefits and and Costs Costs for for Producer
Producer Groups Groups and and the the Society
Society
4.1 4.1 Willingness Willingness to to Pay Pay for for Regional
Regional Origin Origin ? ?
On Consumers' Willingness to Pay for Regional Origin:
Many consumer studies do exist.
Regional-origin foods with reputation seem to be perceived as high-quality foods.
Methodologies used:
Consumer surveys (contingent valuation) econometric demand system
Hedonic price analysis (use of market data on prices and characteristics of goods)
Perceptions of Consumers Concerning the Regional Origin of Foods: Selected Results
Authors/method Subject Results van der Lans et al.
2001 / survey and conjoint analysis
Italian extra virgin olive oils
Some consumer groups value the
region of origin and some do not; direct effect on product preference for
residents of the region; no general positive effect
Teuber 2011 / survey and binary logit
Hessian apple wine
Willingness to pay exists; rises if consumers expect support for local economy; limited knowledge about GIs Hassan, Monier-Dilhan
and Orozco 2011 / demand-system analysis
French cheese
market. PDO versus non- PDO products
PDO demand is more price-elastic than non-PDO demand; PDOs are clearly high-quality products; εD: -2.08
(Comté); -2.91 (PDO Brie); -3.72 (PDO Camembert); - 4.73 (Roquefort)
Loureiro and
McCluskey 2000 /
Galician veal PGI label causes a price premium on high-quality cuts of meat, up to a
Hedonic Analysis:
Specialty Coffee as a Case Study (1)
Basic Basic questionquestion:: Do market data reveal a price
premium for regional origin that consumers are willing to pay (apart from other characteristics)?
How large is the implicit value of regional origin for high-value coffees? (Teuber 2009)
Analysis of internet auction data: "Cup-of-excellence"
website.
Coffees of various important producer countries and regions considered.
Methodology: Hedonic price analysis.
Hedonic Analysis:
Specialty Coffee as a Case Study (2) Basic
Basic ideaidea of of hedonichedonic priceprice analysisanalysis
Consumers buy a good on the basis of its characteristics: Product = a bundle of
characteristics.
Characteristics are what consumers are looking for.
Product prices are a function of the characteristics the goods contain:
(1)
p
=p
(z
1,z
2, …,z
n)Hedonic Analysis:
Specialty Coffee as a Case Study (3)
Applied to coffee varieties:
(2) (2) Coffee price p = p (
score, rank, regional regional originorigin,, coffee variety, certification, year
)
Computation of the implicit price:
(3) (3)
with: = implicit price for characteristic i.
i
i p
z
p / ∂ = ˆ
∂
pˆ
iCase Case Study Study Coffee Coffee Specialties Specialties (3): (3): Results Results
Dependent Variable
Score 0.072***
1st Rank 0.889***
2nd Rank 0.323***
3rd Rank 0.258***
Log (lot size) -0.390***
Log (Coffee Area) 0.028**
Coffee variety Reference:
Bourb on
Catuai 0.013
Caturra 0.049
Pacamara 0.007
Typica 0.051
Others 0.048
Origin Reference:
Honduras
Bolivia 0.488***
Brazil 0.409***
Colombia 0.311***
Costa Rica - 0.083
El Salvador 0.226***
Guatemala 0.559***
Nicaragua 0.168***
Certification Reference: No certificatrion
Organic 0.237**
Rainforest Alliance -0.054 Year
Reference: 2003
2004 0.134**
2005 0.113**
(0.000) Log(Price)
(0.747) (0.000) (0.000) (0.000) (0.007)
(0.000) (0.086) (0.926) (0.564) (0.366)
(0.000) (0.000) (0.000) (0.162) (0.000) (0.000)
(0.002) (0.000)
(0.009) (0.203)
(0.004)
Origin
Reference:
Honduras
Bolivia 0.488***
Brazil 0.409***
Colombia 0.311***
Costa Rica -0.083 El Salvador 0.226***
Guatemala 0.559***
Nicaragua 0.168***
(0.000) (-0.162)
(0.000) (0.000) (0.000) (0.000) (0.000)
***, **, * indicates statistical significance at the 99.9%, 99% and 95% levels.
p-values in parantheses.
Conclusions
Conclusions fromfrom WillingnessWillingness--toto--PayPay StudiesStudies
Willingness to pay for the regional origin: exists according to
survey results;
hedonic price studies.
Potential for a price premium and welfare gain for producers due to protection and promotion of
geographical indications!
But: Case studies needed: Do benefits outweigh the additional costs?
4.2 4.2 Price, Income and Price, Income and Welfare Welfare Effects
Effects of of Geographical Geographical Indications
Indications
The price premium for a high-quality regional product
Economic
Economic definition definition of a of a specialty specialty product product : :
"Specialty food and drink products should be differentiated from mainstream or commodity products". They should "target niche markets and command a premium price" (DTZ Pieda Consulting, 1999).
Regional Regional specialties specialties should should receive receive a a price price premium
premium for for their their characteristic characteristic regional regional origin origin ! !
Markets for a High-quality Regional Product and the Standard Quality with Perfect Competition
DM DGI
MCGI
SM
pGI
qGI
Relevant policy questions and answers
Does the promotion and protection of geographical indications induce a price premium?
Yes, if demand shifts more than supply!
The net producer price will then increase.
Producer welfare will rise, too.
Does promotion and protection of geographical indications improve social welfare?
Not necessarily!
Price Effects of the Protection and Promotion of Geographical Indications
S' S
D' D
Welfare Effects of the Protection and Promotion of Geographical Indications
S' S
D' D
h
a b c
d
e f
g
(with informative advertising; label reduces
consumers' search costs; perfect competition;
check-off program):
∆∆
∆∆ Producer surplus: a + b + c
∆
∆
∆
∆ Consumer surplus: - d - e + h
∆ Welfare: a + b + c + h - d - e
Welfare Effects
Did PDOs and PGIs Raise Producer Welfare? (1)
Only few rigorous empirical analyses!
Broad evidence on quality assurance schemes and commodity promotion:
Producers gain, but:
Very low advertising elasticity of demand (0.1 or less).
Advertising of PDO and PGI labels may be costly:
Largely unknown labels!
Did PDOs and PGIs Raise Producer Welfare? (2)
But: Producers seem to expect welfare gain!
DOOR-Database of the EU, May 2011:
1031 registered PDOs, PGIs & TSGs
515 PDOs, 476 PGIs and 40 TSGs
Majority in Italy (228), France (183) and Spain (148)
47 requests in 2009, in 2010 another 46.
Requests in 2010: 8 PDOs, 33 PGIs and five TSGs.
5 Summary and Conclusions (1)
Geographical indications have the potential to contribute to economic policy objectives:
may reduce quality uncertainty;
may secure intellectual property;
may lead to a price premium;
may raise income in rural areas;
may improve economic cohesion.
5 Summary and Conclusions (2)
Geographical indications bear substantial risks, too:
May foster market power anticompetitive effects!
Do they really provide “true” information?
Do production clubs exclude efficient competitors?
New protectionist instrument in trade policy?
References (1)
Hassan, D., S. Monier-Dilhan and V. Orozco (2011), Measuring Consumers' Attachment to Geographical Indications. "Journal of Agricultural and Food Industrial Organization", 9(1), Art. 5.
Herrmann, R. and R. Teuber (2011), Geographically Differentiated Products. In: Lusk, J., J. Roosen and J. Shogren (eds.), Oxford Handbook on the Economics of Food Consumption and Policy.
Oxford: Oxford University Press 2011, Chapter 33.
Lans, I.A. van der, K. van Ittersum, A. de Cicco and M. Loseby
(2001), The Role of the Region of Origin and EU Certificates of Origin in Consumer Evaluation of Food Products. "European Review of Agricultural Economics", 28(4): 479-498.
References (2)
Loureiro, M.L. and J.J. McCluskey (2000), Assessing Consumers' Response to Protected Geographical
Identification Labeling. "Agribusiness", 16(3): 309-320.
Teuber, R. (2010), Geographical Indications of Origin as a Tool of Product Differentiation: The Case of Coffee.
"Journal of International Food and Agribusiness Marketing", 22(3&4): 277-298.
- (2011), Estimating the Demand for Sensory Quality –
Theoretical Considerations and an Empirical Application to Specialty Coffee. "German Journal of Agricultural
Economics" 59(3): 173-186.
